02 April 2010

Health Care Mandate Minimal

The penalty for failure to comply with the "mandate" under the new health care reform law to provide health insurance coverage for yourself if you don't otherwise have it is quite modest. It is 2% of your income or $695 when fully phased in, hardly the cost of actually buying health insurance. In early years, the penalty, which one can intentionally pay in lieu of obtaining health insurance, is even smaller. There are exceptions, for example, for religious objections.

The bill signed into law (on page 131) specifically prohibits the IRS from using the liens and levies commonly used to collect money owed by delinquent taxpayers, and rules out any criminal penalties for individuals who refuse to pay the tax or those who don’t obtain coverage.

Nobody goes to jail for not complying, nobody is subjected to tax liens for not complying, nobody is forced to actually apply for and obtain health insurance, and nobody is forced to pay the actual full cost of obtaining health insurance. It is just a modest money fine that is enforced like any other debt. It is actually less onerous than an excise tax on people who fail to provide health insurance for themselves.

Thus, if you file a tax return without the proper documentation to show that you have coverage, and can't provide it when the IRS audits you, and no exception applies then you owe the penalty, which the IRS may only enforce like any other civil debt, with a lawsuit to obtain a civil judgment in that amount.

In other words, the only penalty for failure to comply with the health care mandate is the equivalent of a parking ticket, or even closer to this case, a public health user's fee similar to a mandatory trash collection bill sent only to people who don't privately obtain trash collection services.

And, if you do comply, you get considerable tax benefits. This is 95% carrot and 5% stick.

2 comments:

Those are the individual mandates. The employer mandates are onerous, and worse, they are not structured in an incremental fashion.

When hiring employee #50, the employer suddenly has to pay 50 * $750 = $37,500 per year. Conversely, a firm currently employing 50 people has a $37,500/year incentive to find someone to fire.

When hiring employee #200, the employer suddenly has to pay about $1 million/year to cover everyone's health insurance. Thus there will be a lot of mid-size firms aiming to shrink below the 200 threshold before 2014.

There was not even a need for the healthcare bill in Colorado, where the state makes CoverColorado available as an insurance option for those with pre-existing conditions. Other states should have followed Colorado's lead.

When more than 95% of employers of 50 or more people, and more than 99% of employers of 200 or more people already provide health insurance, then a penalty of $750 per employee for one with 50-199 employees (compared to about $15,000 per year per employee to buy typical health insurance) and about $5,000 per employee in larger enterprises, isn't going to have much of an impact. While the structure isn't ideal, the mandate on employers remains very modest.

The CoverColorado equivalent piece of the health care reform bill is very modest. The main relevance of health care reform is to increase coverage rates which in turn will reduce the number of uninsured by about two-thirds. The main way it does that is to subsidize care for those who can't afford it now.